BE aims to beat burnout on FTSE

It is less than a year since nuclear generator British Energy relisted its shares after a traumatic debt-for-equity restructuring that saw previous shareholders' investments all but wiped out.

The company foundered three years ago because it failed to keep its stations up and running and, more critically, because the price of electricity slumped. The upshot was that it was producing less electricity less efficiently and getting paid less for it. In the end, the government had to step in and back a restructuring package by taking BE's nuclear clean-up liabilities off its balance sheet and forcing reprocessor BNFL (which it owns) to offer more generous commercial terms. In return it got a slice of BE's future cashflow.

All of this is now ancient history, for BE's return to the FTSE 100 is being touted as a good bet when the index is rejigged next month. Last week the shares nudged above 450p, on the way to doubling the 238p nadir they fell to in February.

Fuelling its ascent have been the same factors that did for it in 2002, only in reverse. Electricity prices have risen 50 per cent this year, and it has had a surer touch on the operations front, with the appointment of industry veteran Bill Coley as the new chief executive.

The question is, how long will BE keep burning? The reasons for strong electricity prices are the high oil price; gas prices (linked to crude) that have almost doubled in the past year and have seen suppliers hike prices to businesses and domestic consumers several times in the past year; and the introduction of a market in carbon, which has seen the price per ton of emitted CO2 triple.

Nuclear generation benefits from this combination of factors. It does not have to pay high oil or gas input costs, so avoids a squeeze on its margins or loss of market share. And although nuclear power is included in the European Emissions Trading Scheme, the level of CO2 emissions is minimal compared with other fuels such as coal.

Predicting oil and gas prices is hazardous. But as oil pushed through a new high of $64 a barrel last week, commentators were not calling the peak. At the same time the OECD's energy think tank, the International Energy Agency, published a bullish report. BE bears point to a price in the mid-$40s as a more realistic medium-term level and back into the $30s by 2008.

Longer term, gas supply to the UK will increase, both through liquefied petroleum gas supply and new pipeline capacity to continental Europe. A BE share price around 375p is thought to be more realistic long term. All of this implies a cooling of BE.

But here is the crux. If BE makes it into the FTSE 100, its shares will get a further boost as portfolio investors add them to their holdings. The question is, will oil and gas prices hold on until the FTSE reshuffle next month?

Follow the lady to find the profit

It will be a case of find the lady for investors in Balfour Beatty as it announces first-half results next week; or rather spot the difference in earnings caused by a change in the method of valuing its PFI assets under new International Financial Reporting Standards. Despite the promise of superfluous numbers and abundant confusion, analysts and investors will have an eagle eye out for the builder's numbers.

Not that the company is preparing a three-card trick. It will be forced by the introduction of IFRS to account differently for the profits it records from its PFI portfolio. The significance comes because Balfour has one of the broadest collections of PFI projects, ranging from Scottish schools to a Birmingham hospital and the London underground.

Many analysts are not making forecasts for Balfour's numbers next week. One that does expects Balfour to announce pre-tax profits of about £62 million for the first half. Before the revaluation, this number would have been £68m. This implies a revised year-end figure of £117m compared with £160m otherwise.

Time to mark the shares down? No, say the experts. The reasons? First, that it will happen across the sector. And second, PFI projects are not valued by their ability to generate profit. It is cash that matters, and this is dependent on the value of the equity held in the projects which comes back to shareholders as a dividend, either through a sale of the stake or by increased revenues as projects move from planning and construction phases.

In Balfour's case, sales of stakes are not preferred. The company says it is in PFI for the long term. And, once the accounting changes are factored in, the growth in earnings is expected to be 7 per cent - the same as it would have been anyway.

Fly me to the bank ...

'Come fly with me, let's fly, let's fly away,' sang Frank Sinatra. He could easily have been talking about the Easyjet share price. As far as the market is concerned, this one is certainly a flyer.

The share price rise over the past nine months - more than doubled, to over 300p - suggests that a bid is in the offing, and that a large number of investors are banking on a bid pretty soon. The apparent bidder is Icelandair, the flag carrier of the little island that has assumed the stature of a full-blooded Viking raider. Anything that moves sharply in the City these days is assumed to be the target of a horned-helmetted invader.

This time, it is the parent company of the Iceland airline, FL Group, which is regarded as the potential buyer. It has built up a 13 per cent stake in Easyjet, and it isn't hard to see why. Easyjet was built on a sound business model, efficiently digested Go a couple of years ago, and still has landing slots and routes others would pay a lot for.

It also has an unstable family shareholding, with founder Stelios Haji-Ioannou and two of his family sitting on 40 per cent. But with inter-sibling rivalry said to be a very serious factor, it seems likely at least some of that stake could be shaken loose, and head off in Reykjavik's direction.

There are the usual reservations about the Icelanders, though. Is FL big enough to afford Easyjet? Can the provenance of Icelandic funds be verified to the authorities' satisfaction? How will FL overcome restrictions on foreign ownership put in place by the founders?

None of these are easily answered, which is why private equity groups could find it easier to unlock the Easyjet conundrum than the Icelanders. Whatever the outcome, shareholders should strap themselves in and enjoy the ride. 'It's perfect for a flying honeymoon, they say,' as Ol' Blue Eyes crooned.